Subject: Independence
Author: Frank Bradley
Date: 07/20/2000 3:38 PM
Dear Mr. Levitt,
My name is Frank Bradley, and I work for Ernst & Young, one of the Big 5
accounting firms that you seek to regulate. I can't think of a better solution
to the problems regarding auditor independence than what you have proposed. I
read today that your plan to bar Big 5 firms from doing both audit and non-audit
work is being challenged by a group of lawmakers. I suggest you look to see who
donated to those lawmakers campaigns.
I am an administrator with Ernst & Young. LLP in New York City. I've been with
the firm for almost three years. From what I've seen this industry definitely
needs some regulation.
Do you know what IRS employees with twenty years of service and a government
pension are worth to a Big Five firm? They are in demand with the Big 5. Do you
know why? It's obvious, I know, but to put it in writing, after twenty years of
facing off against the Big 5 in audits, these ex-IRS employees can tell the
audit firms what the IRS is looking for in these audits. They have the inside
scoop on how to get away with whatever they can get away with.
Now, in the free market an employee should have the opportunity to go where they
want. After twenty years with the IRS, these folks deserve an opportunity to be
employed in the private sector and earn a competitive wage. However, if you were
an IRS employee nearing the end of 20 years, and you knew that a potential
six-figure salary was waiting for you once you retired with Ernst & Young,
Deloitte & Touche, or PriceWaterhouse Coopers, then how would you respond to
these people you are auditing when they bring in one of their Big Five hired
guns? Do you make friends hoping for a job offer once you get out, or do you toe
the line and make corporate America pay the bill? I'm not saying I know of any
collusion, I don't, but certainly the tradition of being hired by the Big 5
after retiring could have the effect, the appearance, of tainting the whole
auditing process.
Now on the surface this may appear to have little to do with Auditor
Indpendence, but it does have bearing. It helps to create a culture that allows
independence to be violated. Look at the internal audits conducted this year by
some of the Big 5 firms (PriceWaterhouse Coopers for instance) where they found
that firm partners owned stock in some of the very companies they were auditing!
We are not talking about a small percentage either.
In this era of the new economy and electronic investing, auditor independence
is more important than ever before. Fortunes are being made and lost in the
blink of an eye, and even the smallest rumor can affect the fortunes of one
company and thousands of investors. As someone who has seen the inside of this
industry, I whole-heartedly applaud your efforts to introduce some reasonable
restraints.